Avoid Portfolio Managers Who Are on a Streak — Whether Hot or Cold A new paper finds that performance streaks, both winning and losing, change fund managers’ behavior — and investors don’t win in any case. Julie Segal November 12, 2018 PGIM Fixed Income: How to Pinpoint an Asset Manager to Help Shape and Execute Your Active Fixed Income Strategies[/paste:font] [IIDeep Dive: Your Brain Wants You To Make Bad Decisions. Here’s How To Avoid Them.] Those emotions can affect even the most rational investor. Twenty-one percent of fund managers on a winning streak in the study changed their behavior meaningfully when it came to daily portfolio turnover. Two-thirds of those managers reduced turnover by 16 percent at the median. But the remaining one third increased their turnover by 69 percent, Essentia found, a much larger amount than those who reduce it. Essentia attributes the substantial increase in turnover to the so-called “House Money Effect,” as it was called in a 1990 academic paper, where people take more risk when they have had recent gains. It can also be explained by what Essential calls thevictory effect, when people take more risk after a big win. “If you ask most fund managers or traders whether they behave differently, vis-a-vis investment decision-making, when they are on a winning or losing streak, they will say ‘probably.’ But very few could tell you exactly how their behavior changes, or whether the quality of their decisions actually improves or deteriorates,” wrote Essentia founder and CEO Claire Flynn Levy in the paper’s foreword. Losing was more problematic. According to the study, one in four managers acted far differently when on a losing streak compared with when they were winning. All managers traded more when losing, with a median increase of 110 percent. A portion of those managers actually traded three to four times as much when losing. “When on a losing streak, they were instinctively acting as though the likelihood of the decisions they were taking being right was somehow significantly greater than usual, as though taking the view that not only is ‘it broke’ but that they could ‘fix it,’” according to the study. https://www.institutionalinvestor.c...gers Who Are on a Streak Whether Hot or Cold
avoid portfolio managers altogether unless you are looking for bragging rights that you are part of a very select group that a portfolio manager tells you he accepts as clients. your wallet will thank you someday.
This problem affects all of us. When on a losing streak, do revenge trades to make a comeback. When on a winning streak, relax on risk management rules.
Bill Miller may have beaten S&P500 for 15 years. His fund lost 58% in 2008. It will be interesting to calculate if he destroyed more investors' money than made his investors money. The influx of investors' money will come near the tail end of his successful winning streak. This is why the 58% loss is so painful as it occurs at a time when the fund is near its peak size. https://www.wsj.com/articles/SB122886123425292617